Aggregate Demand and Aggregate Supply (Mankiw)

Flashcards covering the key concepts, theories, and definitions of Aggregate Demand and Aggregate Supply as presented in the lecture notes based on Mankiw.

Recession

A period of declining real incomes and rising unemployment.

Depression

A severe recession.

Business Cycle

Short-run economic fluctuations that correspond to changes in business conditions; these are irregular and largely unpredictable.

Real GDP

The variable most often used to examine short-run changes in the economy, measuring the total production of goods and services.

Natural Rate of Unemployment

The rate around which the actual unemployment rate fluctuates, typically estimated at about $5\%$ or $6\%$.

Classical Dichotomy

The separation of economic variables into real variables and nominal variables.

Monetary Neutrality

The assumption that changes in the money supply affect nominal variables but do not affect real variables such as output or unemployment.

Model of Aggregate Demand and Aggregate Supply

The model most economists use to explain short-run fluctuations in economic activity around its long-run trend.

Aggregate-Demand Curve

A curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level.

Aggregate-Supply Curve

A curve that shows the quantity of goods and services that firms choose to produce and sell at each price level.

The Wealth Effect

The phenomenon where a lower price level raises the real value of households’ money holdings, making them feel wealthier and stimulating consumer spending.

The Interest-Rate Effect

The phenomenon where a lower price level reduces the quantity of money households demand; as they convert money into interest-bearing assets, interest rates fall, stimulating investment spending.

The Exchange-Rate Effect

The phenomenon where a lower price level reduces U.S. interest rates, causing the dollar to depreciate in the market for foreign-currency exchange, which stimulates net exports.

GDP Components Equation

$$Y = C + I + G + NX$$

Natural Level of Output

The production of goods and services that an economy achieves in the long run when unemployment is at its natural rate; also called potential output or full-employment output.

Sticky-Wage Theory

The theory that nominal wages are slow to adjust to changing economic conditions, causing the short-run aggregate-supply curve to slope upward.

Sticky-Price Theory

The theory that the prices of some goods and services adjust slowly to changing economic conditions, often due to menu costs.

Menu Costs

The costs associated with changing prices.

Misperceptions Theory

The theory that changes in the overall price level can temporarily mislead suppliers about what is happening in the specific markets where they sell output.

Short-Run Aggregate Supply Equation

$$\text{Quantity of output} = \text{Natural level of output} + a(\text{Actual price level} - \text{Expected price level})$$

Stagflation

A period characterized by falling output and rising prices.

Wage-Price Spiral

The process where rising prices lead to higher wages, which in turn lead to even higher prices.

John Maynard Keynes

The economist who published a book in $1936$ attempting to explain short-run fluctuations, advocating for policies to increase aggregate demand during recessions.